Capitalism is cruel on the long-lived. Entrenching cultures and ways of doing things, the passing of time breeds complacency in the old on which the new pounce.

David Jones was founded in 1838, Myer in 1900. Whether they merge or not, and it would make sense to do so, both are unlikely to survive in anything but a token form in a decade or so.

DJs and Myer emerged from capitalism’s primordial soup caked in a belief that their magnificent brands and fine service, when you can find someone to deliver it, would always lure customers.

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A 15-year credit boom that delivered profitable growth hid the changing reality. Instead of adapting to a new environment, higher costs were passed on to customers and difficult choices, like renegotiating rents or closing stores, were avoided.

Online retailing got underway in the dotcom era and to its credit DJs got in early, picking up the assets of three failed ‘etailers’. But three years and $28m later, former CEO Mark McInnes closed the sites down.

It was a grievous error. The chance to be at the forefront of online retailing, to stake out territory and learn, was forsaken to protect the bricks and mortar stores. From that moment, DJ’s defences were wide open.

In contrast, US department store Nordstrom persisted. Now more than a quarter of its sales are online, and they are more profitable than those in its stores. Just 1 per cent of David Jones overall sales come through its website.

It took almost 10 years for DJs to right the McInnes’ error. Paul Zahra launched the company’s ‘omnichannel strategy’ – a phrase that almost pleads for failure – in March 2012 but the moment was lost.

A few minutes spent at Asos.com or Theiconic.com.au and the gulf between native online retailers and those migrating from bricks and mortar becomes obvious. A small example: if you want to order a present from a Myer gift registry online the company advises you to ‘print it out and take it into your nearest store.’ The week-long crash of Myer’s website during the Christmas sales only emphasises the point.

But it’s not just online retailers sniffing out complacent incumbents. International retailers that have honed their skills in hyper-competitive US and European markets see huge opportunity in Australia.

Gap, Ladurée, Mui Mui, Paul Smith, Top Shop, Zara, Abercrombie and Fitch, Hollister, H&M and Uniqlo have either already arrived or are coming soon. More will follow.

This makes the lives of department stores even harder, as does Australia’s shrinking middle class from which they’ve traditionally drawn their customers. This is a point not much discussed but of vital consideration.

According to the OECD, of the total growth in Australian's income over the past 30 years, almost half went to the richest 10 per cent. That’s not as extreme as the US, where the top 10 per cent got 80 per cent of the pie, but it's a significant shift.

In the United States, the hollowing out of the middle class is already having an impact. Upscale stores like Nordstrom and Barneys are expanding, as are bargain basement outlets like Dollar Tree.

In the shrinking middle sit the US equivalents of Myer and DJs. In January, Sears announced it would close its flagship Chicago store while JC Penny said it would close 33 stores.

Since their peaks in early 2007 their shares have fallen 82 per cent and 94 per cent, respectively. Since 2009 they’ve fallen around 30 per cent and 75 per cent, while retailers targeting either the very rich or very poor have generally doubled or more. The middle is becoming a bad place to be.

Facing more adept competition, online and off, and a shrinking middle class, the future for David Jones and Myer looks bleak.

Should they fail to adapt, in a decade department stores will be a retail curiosity much like milk bars and ice cream vans, a reminder of how mum and dad used to shop before Zara, ASOS and Topshop.

If they get it right, a few department stores will pepper the upmarket shopping centres in our richest suburbs. Those in Roselands, Glen Waverley, Chermside and Karrinyup will be long gone.

Should David Jones and Myer merge, they can close more of those stores more quickly, improve their collective buying power and reduce head office costs. But this will only serve to delay the inevitable shrinking of their size and influence.

The department store era is all but over. The principal task for directors is to manage the decline.

This article contains general investment advice only (under AFSL 282288).

127 comments

The only constant in life is change and I guess the world will be a totally different place in twenty years time.

Commenter

James

Location

South Yarra

Date and time

February 10, 2014, 1:46PM

That's right but sometimes you need to look back to see what worked well not just look forward. I think there is a real need and I suspect a demand for a giant flag ship store in the city for both retailers that is FULLY STOCKED with both MERCHANDISE and STAFF. If I go into a store one more time to be told by some kid that they can order it in I think I will gone for good (like most people I know). I can order from home thanks- and have it delivered to my home thanks. I am willing to pay more if I can go and look at it and buy it there and then and take it home. And I would love to see lots of mature age staff on the floor that are grateful for their job and do it with passion. Are you free Mr Humphries?

Commenter

Peter

Date and time

February 10, 2014, 2:18PM

Whoa! Stop. The thrust of the article is that the retailers have declined because the middle class has declined.

America went this way back in the 1990's

So what is the result? Suddenly we can't buy the products that we produce. I mean, the middle class can afford to purchase only a portion of what we used to. So who suffers? Of course the middle class, but also the local producers.

Don't fool yourself. High wages give us the purchasing power to make entrepreneurs wealthy. It gives us the economy to support local producers, whether its a restaurant or a new kitchen.

Whether we are externally competitive is the function of the exchange rate. We we so much better off when the dollar was 70c

Fusion brands are an example of designers coming into the middle ground so it's clearly still a profitable, desirable market. I am middle class and do not shop in shopping centres for clothes because they are generally poor quality and are boring. I don't think the middle class is shrinking it's just shopping elsewhere......it's not just online stores, but individually made pieces on places like Etsy I buy. But I still love the high street and to be able to see materials in the flesh and browse, in a real tactile way, which cannot be replicated by online shopping and that's where the future of retail lies.

Commenter

Fusion brands anyone?

Location

Northcote

Date and time

February 10, 2014, 5:09PM

Somethings will always remain the same such as conservatives running witch hunts after commies, unions or who ever else they figure they can kick to get a vote. Meanwhile the economy will drift, industries will be lost and the middle class will shrink and the wealthier will get wealthier.

Commenter

Simon

Location

Blackburn

Date and time

February 10, 2014, 5:14PM

To much credit owing,Globalisation and the wealthy owning politicians to get more back in their pocket are the chief causes of the current decline both here and in America.I for example run a maintenance business and a online business selling a niche product and sales in both areas have dropped off by 80% in both businesses beginning from April last year.One supplies services to working class and the other to middle class.I am just about to go under and am in the sell of phase trying to survive.I build oz product by Australians to sell online but just get beaten because my overseas competitors online don't have to pay GST. I believe in competition but its hard when not on a level playing field and the Australian Government is giving you foreign competitors a leg up.I go under and another 3 Australian are out of work which again reduces purchasing power and in turn more jobs lost and on it goes which is currently what is happening now.The unemployment rate does not take into account part time and casual employed which has increased considerably in the last 7 years and would take the unemployment level easily over 10%.

Commenter

Mark

Location

oz

Date and time

February 10, 2014, 6:25PM

DJ was always too snooty and expensive. Myer started going that way when it closed its bargain basement. And the renovation of the city store confirmed it. I went looking for a nice simple cutlery set before xmas. The cheapest in Myer was about $250. Target and BigW had nice choices for a fraction of that. They've moved in on Myer's old market. Mens clothes ? Much, much cheaper online from OS, or when travelling OS. Never thought London and New York would be cheaper, but they are, often by a long shot.Not sure about the US analogy in the article though. Sears is more your Target / Kmart level than a Myers, but Sears is now just plain dreary compared to those stores in the US, and Walmart too.JC Penney / Macys is where Myers used to be. Some of those stores will survive, but not Myer now that it has ideas above its station. The US has a xxxxload of "new poor" who can't afford to shop where they used to. Australians could, if only the old Myer still existed.BTW I loved Uniclo in Hong Kong, New York, Singapore, Bangkok. The range ! And reasonably priced. They're going to make a killing here.

Commenter

Fred

Location

Melbourne

Date and time

February 10, 2014, 7:06PM

I agree with Peter, people still want to shop on foot but Myer and DJ's are absolutely terrible... give people a great shopping experience and you can take this market.

Commenter

Cathy Little

Location

Prahran

Date and time

February 10, 2014, 9:25PM

Correct but just like many other businesses this is a failure of management to understand their changing customers, and dare I say it, even visit their stores and look through the eyes of their customers. Dept stores no longer offer 'value'. Overpriced merchandise, in average surroundings with absolutely no service. Having been in DJ's on Saturday and walked from the ground floor to the 1st floor exit and encountering one half hidden staff member, I would not have been able to find anyone to give my money to had I wanted to buy something. The overall experience is woeful. No excitement, no retail theater - just stock on shelves in these stores be they DJ's, MYER or Harris Scarfe. Value is more than price and these stores just don't get it. Kmart has re-positioned itself offering acceptable quality at cheap prices whereas Target remains stuck in no mans land - not cheap, average quality, limited selection and no service. Is it any wonder customers are seeking newer brands, formats and particularly going on line for cheaper prices, wide selections and no surly staff to contend with - when they can be found. As a retailer it is frustrating to see the missed opportunities, yet head offices swell with highly paid execs with big egos that have lost the art and passion for real retail which focuses on the customer. Everything else then takes care of itself. Just as milkbars are stuck in a 60's time warp overtaken by modern convenience stores who do reinvent themselves, so too have department stores become stuck in a time warp but have not reinvented themselves as their customers have changed.